Article written by David Hanson, CPA, LattaHarris, LLP
In 2014, President Obama directed the United States Department of Labor (DOL) to update federal regulations defining which “white collar workers” are to be protected by the Fair Labor Standards Act (FLSA) minimum wage and overtime standards. This action was in response to the President’s stated goal of ensuring workers are paid a “fair day’s pay for a hard day’s work”. The President noted and the DOL stated that the salary threshold from which eligibility for overtime pay is measured had only been updated once since the 1970s. The result – the salary threshold had fallen woefully behind what a “fair level” should be because of the effects of inflation over forty plus years. It followed that many workers who should (in the opinion of the President and similar interested parties) be receiving overtime pay were not. Consequently, two short years later, on May 18, 2016, the DOL announced its final rule updating the overtime regulations.
The final rule
There are two tests to determine if an employee is exempt from overtime pay; the “salaries test” and the “duties test.” The annual salary test level necessary for an employee to be exempt (exempt meaning ineligible for overtime pay) has been increased from $23,660 (old rule) to $47,476 (new rule). Yes, this is an increase of over 100% ! A slightly modified exemption exists for employees who are considered executives, administrative, or professional employees and are “highly compensated”. The salary test level for a highly compensated person falling in this category has been increased from $100,000 to $134,004.
In addition to the salaries test described above, there is a duties test that applies in determining the applicability of overtime pay for an employee. For employees who are in what are traditionally considered “white collar” jobs including, but not limited to executive, administrative, or professional jobs, they are exempted from overtime pay (unless they are considered highly compensated (see above)). For employees who do not fall into the preceding categories, who do not aid in the management of a business, and are not a professional, they will, as a general rule, be eligible for overtime pay (taking into account their salary test as well).
Any business that has an annual gross volume of sales made or business done equaling $500,000 or more under federal law must abide by the new overtime rules. However, states may have different (lower) levels that apply. For example, in the State of Iowa, the level is only $300,000. If a business’s employees participate in interstate commerce or the production of goods for commerce the business must follow the FLSA. Hospitals, schools, public agencies, etc. do not qualify for exemption regardless of sales or business. It is important to note all of these rules must be met to be exempt from adhering to the new overtime laws and regulations.
The Farmer Exemption
Before all of the farmers out there order their workers to park the tractors, put down the shovels, and to stop feeding the livestock, farm work is generally exempt from overtime rules. However, bookkeepers, administrators, and management would not be included in this exemption. Farmers should also be wary of a few stipulations such as the combination of farm work and non-manual labor. For example, if a bookkeeper for the farm also has the duty of feeding the livestock, all of the work performed by the individual will most likely be subject to overtime rules.
Overtime can go hand-in-hand with minimum wage and it is important to understand the rules and exemptions for both. Exemptions include: agricultural employees who are immediate family members, those principally engaged on the range in the production of livestock, and non-local minors (16 years of age or under) paid on a piece rate basis equal to those over 16 years of age. Typical problems farmers have are maintaining records of names and permanent addresses of temporary agricultural employees, birth dates for minors under age 19, and hours worked by employees. When paying an employee on a salary basis, even if exempt from overtime laws, minimum wage laws must still be followed. Therefore, monitoring hours worked by employees is a must to be certain they are paid at least minimum wage.
Preparations and Issues
The adjustments required by the final rule will become effective December 1st of 2016; consequently, it is important for affected employers to plan and prepare so as not to be blindsided. Current job descriptions and salaries should be reviewed and compared to the new standards to determine possible exemptions. Training and explanation of the new rules to employees is an absolute necessity for a smooth transition. Employees must understand a business’s standards for overtime to prevent payment of excessive wages. Adding part-time workers may be a viable option, as well as payment on an hourly basis instead of a salary basis.
Hidden overtime, non-approved overtime, and non-reported overtime are all possible issues that need to be examined as well. Hidden overtime could potentially be items such as working from home, answering phone calls, texts, and emails after hours, and working through lunch or before/after normal business hours. Non-approved overtime must be paid even if it is clearly stated overtime is not allowed. Also, if an employer is aware that an employee is working additional hours even though it is not reported, it still must be paid.
Problems may arise from the imposition of the new final rule. Businesses may end up cutting back workforces because of the higher salary levels, offering less flexibility regarding work hours, and instituting restrictions on working out of the office. It is likely certain employees will feel as though they have been demoted if changed from being paid on a salary basis to an hourly basis.
To a certain extent, the jury is still out on whether the new final rule is an overall positive or negative for all concerned. While it is likely that employees whose compensation increases because of the new rule will favor the change, those whose status is changed (including losing their job) will not be in favor. Employers whose payroll costs increase because of the new rule will not be thrilled. Nationally, businesses organizations such as the U.S. Chamber of Commerce and the Small Business Administration have publicly expressed their opposition to the final rule and are advocating for the rule to be rescinded or amended. Stay tuned for further developments on this issue this fall.
To adequately and accurately assess the impact of the new final rule on your business, seeking the advice of a qualified business advisor is highly recommended.
Article written by David Hanson, CPA, LattaHarris, LLP